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Brooks Automation, Inc. (NASDAQ:BRKS)

BarCap 2012 Global TMT Conference

May 22, 2012 4:15 p.m. ET

Executives

Martin Headley - EVP & CFO

Analysts

Olga Levinzon – Barclays Capital

Olga Levinzon – Barclays Capital

Good afternoon. I am Olga Levinzon, (inaudible) at Barclays. And it’s my pleasure to introduce Mr. Martin Headley, CFO of Brooks Automation.

Martin Headley

Thank you very much, Olga. And welcome to Brooks. For those of you who may not know, just remind you that our core market historically has been semiconductor front end and those markets adjacent to that market, being markets such as MEMS, LED, data storage as well as some of our general vacuum markets that we generally call an industrial one. For those markets we provide robotic handlers and systems from which the Brooks Automation name originally comes.

But through acquisitions we’ve made in the past, we also have cryogenic vacuum pumps and cryochillers and vacuum instruments where we are also a market leader, as well as the service support of those products in the field. And we serve a market value of about $1.5 billion. In addition, by virtue of acquisitions that we started making during 2011, we have new markets which surround automation in life sciences. And the core and the starting point of those acquisitions is automated cold stores for critical sample management. Around that is cell imaging for sample preparation and verification. And we currently service a market of about $300 million. So our current served markets are about $1.5 billion.

Just at semiconductor and adjacent market. When we look at that $1.5 billion, we serve about 30% of the market, we’re growing the market share. And if you look at growth that people would project for those markets, we’ll conservatively view that, that should grow at a compound annual growth rate of between 7% and 12% with some of the key growth drivers for us as well as for the markets in general being mobile telecommunications and mobile computing where our served market increases not just because of chip content but because of the MEMS devices that are included in those devices, LED, and OLED screens and the coatings that go on some of the mobile computing devices that utilize some of our mixed gas cryochillers.

In terms of how we look at market share, we track that and we track our future growth in market share by design-in wins for our Books Product Solutions group, or BPS group. And if you look at the wins at OEMs in semi and adjacent over the course of the last six quarters, we talked about them averaging between 15 and 20 design-in wins a quarter. Actually we’ve only had one quarter where the number actually within that which was our last quarter, or a September fiscal year end. So our March quarter was the second quarter of fiscal ’13. And we had 17 design-in wins, nine of those were for semiconductor front-end and eight for wafer adjacent market.

You can see from this graph that we are establishing a strong market position even though it’s relatively modest revenues at the moment in terms of the design-in wins in those adjacent markets but should, could rise to significant revenue growth in the future.

Why the design-in wins matter and what is the cycle? Well, they matter because they’re relatively infrequent. They are also very expensive investments for OEMs. So they’re going to do relatively few design-ins of new platforms and given that cost of designing our components or our chip systems into a tool, they stick and they are generally designed in for the life of a product that is typically over five years.

I am frequently asked, well, how do I judge these design-in wins versus the revenue potential and that is tricky. But I will give you some sizing there. You will typically see very modest volume during the initial part of the design-in wins, a period of three to nine months where the initial design work is done, where you might make an initial shipment to engineering function for them doing the design. And then there might be more volume, but still not the full volume over the course of the next nine to 24 months, the OEMs ship beta and evaluation units. And it’s only then something of the order of two years after initial design-in wins where you can realistically expect volume.

I just want to touch on one of our groups here, our robotics group which is the largest of our product groups and really talk about some of the new market developments and also not because of the market developments and product developments in our other groups, instrumentation, vacuum equipment and most important, (indiscernible) where Brooks serves our customers extremely well, where we address complexity, where we address flexibility and the need for higher payloads.

And you can see some examples here where for instance, fabs and foundries because they are finding their AMH test systems are not getting the wafer counts exactly right to their initial tools. They are looking at building buffers that require high Z robots at the tool level. You see independent motion is supporting much higher throughput drop-through tool and with wafer back-end processing, we’re seeing a need for flipping of wafer. All of these components, we’ve worked hard at developing with new products recently.

In our adjacent markets, you can see where we may need to, rather than handle the perfectly round, perfectly formed silicon wafers or near perfectly formed silicon wafers that you experience in the front end, you start dealing with bowed, thin, and translucent substrates in wafer back-end and LED and compounds semi. Where alignment of wafers into our automation is extremely important, some of our alignment tools are fit in that throughput.

And then higher payloads driven by adjacent markets such as LED, flat panel display, OLED and solar have driven us to develop even higher payload robotics. So our served and adjacent markets moved from about $1.5 billion in 2011 to about $2.2 billion by 2014 and with a robust improvements in market share you can see the revenue growth that should be anticipated.

Then also look to diversification way from semi front-end, of why we are doing this and what are the benefits for the company and for our shareholders. First, we are looking to leverage our core competencies to spur further growth. And in doing so, we are targeting higher growth markets. We also aim to reduce the cyclicality of our overall revenue patterns and we are looking at higher gross margin opportunities. And equally important is the diversification of our customer exposure.

And the principal such area that we arrived upon after a deal of strategic analysis was an opportunity in life science systems, specifically in automated cold sample storage. There is a market, that’s $150 million and we believe to be growing at over 20% per year. Factors in the markets are changing in our favour. With more automation required, colder temperature is necessary and the quality of the cold chain and the handling of those samples matters more and more. Research scientists and development engineers find sample liability and sample quality to be increasingly important. And the engineering is the key to resolve the complexity of the automation and the provide those ultra-low temperatures. So we are not becoming scientists in the area, we are leveraging on our core engineering skills.

Beyond this, we see opportunities for expansion into other areas of life sciences which is a vast area. But first, we are going to succeed in this core area.

Why is it such a relatively obvious step from where we are today? On the slide you see here, you will see that we have set out the common architectures between one of our semiconductor products, reticle stocker that we’ve provided for many years and a illustrative automated cold sample store that’s used for storing biologics. In it you will notice a storage module with robotic handling to provide delivery of samples, in the case of semiconductor, reticle, to a front input station, in the case of the universal BioStore to the right, biologic samples to deliver to the input station.

Additionally, you will note that the universal BioStore requires extreme cold and that’s a core competency and particularly as we speak to drive these stores to handling and operating at even colder temperatures and utilize our cryogenics mixed gas cryochiller competencies to drive those stores.

The automated sample store installed base began with the provision of stores to compound samples. This was initially a market servicing pharmaceutical companies where million sample drug discovery libraries were built by major pharmaceutical companies. Those automated compound stores have grown and continued to have a nice growth but a relatively modest growth. The key growth driver is in biological sample. More recently, biomarker disease research and personalized medicine initiatives, requiring millions of samples to be stored, and you see how our growth in BioSample stores has really started to take off in the course of the last three or four years.

Currently more than a billion Bio-Samples stored worldwide, blood tissue, DNA, RNA, antibodies, cells et cetera. And what people are find these are automated rather manual freezer systems are essential for maintaining sample integrity and traceability. These amounts of samples being stored are increasing both in terms of within those established nations that have had programs of storage as well as the other geographic areas. As global population and aging and standard of living increases, placing greater demands on the need for better healthcare. And very strong funding in the area of personal therapeutics and clinical diagnostics on personalized medicine opportunities for understanding disease mechanisms and creating new disease treatments.

If you look at where our customer base is, within those hundreds of our customers that utilize our sample stores. You see here illustrated a such of those to 20 pharma and biotech and others who utilize our minus 20 stores. But we also lead the way with bio-sample storage system typically at minus 80 degree C, where you see a growing sales and a growing user base of research institutes. So we have meaningful consumable and service revenue streams. The automated storage systems represents about 50% of our revenues in this area. Instruments and devices which are used in preparing samples for matching samples and analysing samples, represent about 15% of the revenues. Consumable devices, most notably trays and vials are unique and work highly effectively in our stores, are about 15% of revenues. And our field service and support is about 20% of our revenue.

So if we go back to look at our served markets, we are $1.3 billion today and you can see that with the growth that we should have without market share growth, that served market approaches $3 billion in 2014 with an increasing market share -- with 70% growth in SAM with increasing market share.

One of the aspects about this path of the business model that we increasingly like is the diversification, and if you look at the quarterly revenues of our business, excluding the contract manufacturing business that we divested in June of last year which was a low gross margin, reasonable ROIC but low technology business, our focus on higher technologies and our investments in the life sciences area are bringing about greater diversification. You can see the market conditions of our semiconductor business was actually recovered very close to the level it was at, at the very peak of the cycle last year even by the March quarter.

You will see there the orange bar, the adjacent markets have run significantly and our position is even stronger as I mentioned earlier. Clearly there are a variety of over-capacity situations in LED, solar and MEMS that come into play. Our industrial markets started to recover firm at the back end of the March quarter and we see that on a typical path where it lags the semiconductor business by a quarter or two. And already we’ve built the life sciences business to $60 million run rate business. Throughout this, we seek to have consistent cash profit drop-through to the bottom line which we measure it by adjusted EBITDA. You can see that (indiscernible) we’re being fairly successful since we restructured the business in fiscal 2009 taking substantial costs out from the business at that juncture.

If you look at our trailing 12 months performance, at March 2012, I think it’s instructive to look at a business that was $534 million, excluding contract manufacturing, of which $406 million was in our Brooks Product Solutions, this encompassing the trough of the cycle. Our Brooks global services business is about a $90 million business, and incorporated within that $534 million was life sciences systems at $38 million. As I previously observed, it’s running – it’s about a $60 million business currently, you can add $22 million to that $534 million for what the run rate is of the BLSS business.

Our gross margin was 35.8%, we are targeting greater than 40% margins. Two, three factors impacting that margin performance currently. Firstly is as I said, incorporating and encompassing the lower part of the cycle, so absorption, lower absorption of overhead, fixed overheads during the period had an impact. Secondly, we’ve had a very high mix of some relatively low margin semiconductor product sales – particular product types to particular customers. Those are exceptional and we do not believe for them to be a continuing pattern in the future. And thirdly, we’ve had some cost issues around rare earth metals and electronic components which we believe we’ve seen the worst of, and certain of our supply chain and reengineering efforts will get us beyond those in a relatively near future. Beyond that, we’ve talked a lot about our initiatives in operations and supply chain to drive it further and generate millions of dollars of improvements to take us to that 40% margin.

A good number of the supply chain initiatives are executed in terms of negotiations and agreements with the suppliers. We’re going through the phase common in our industry of copy exact qualification with our OEM customers before we could launch those and see those drop through our gross margin line.

The trailing 12 months, we have $46 million of RD&E. We are planning approximately $48 million for all fiscal 2012 and we’re running at just over $100 million, I think we would look this business to have around about $100 million of SG&A and have considerable elasticity to grow and continuing to run at that kind of level. So in the trailing 12 months, an 8.3% operating margin, clearly you could see as we get further on with our initiatives and with developing growth, could be over 10% and a nice EBITDA margin of 13.5%.

June quarter guidance, sequentially flat to up 5% in the range of $140 million to $147 million. Our adjusted EPS will have a comparison sequentially that’s challenged by some favorable Q2 events, but our guidance of $0.15 to $0.20 is robust and there will be some restructuring charges associated with our focus on reductions of operating expenses, will bring our GAAP earnings into the range of $0.13 to $0.18.

Our focus on capital deployment is continuing to build through strengthened performance on the $205 million of cash and marketable securities that we currently have, about $3.10 per diluted share. We have no debt. Majority of that $200 million is readily liquid and available to us. In terms of the use of that, we are already funding strong levels of internal technology development. We have a quarterly dividend of $0.08 per share that we declared for the third successive quarter, and we have a continued focus on smaller acquisitions that support our diversified growth strategies.

Our key metrics for success as we move forward, to grow revenues in excess of 20%, move our gross margins in excess of 40%. Our reactive business model that ensures at least 40% of every revenue dollar through on revenue changes and to manage our working capital strongly such that our asset velocity is a term we use internally, which is our working capital to annualized quarterly revenues is managed to less than 15%.

So in summary, we have very significant growth opportunities in the markets we serve. We’re very well positioned to capture more market share in these markets. We have the initiatives in place to secure improved gross margin. We have the growth of the balance sheet to execute on the vision and we have a capital model that provides returns to shareholders.

So with that, thank you for your interest.

Question-and-Answer Session

[No Q&A for this call]

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